SDB Club Benchmark Real Estate

The popularity of Option Adjustable Rate Mortgages has skyrocketed over the last year, mainly because of their ease of qualification. These loans come with the flexibility of multiple payment options allowing homebuyers with very tight budgets to purchase homes. The problems arise because homeowners dont understand how the loans work and lose their homes at foreclosure when they can no longer afford the payments.

Option loans are a mortgage with an adjustable interest rate that offers the borrower four payment options. The first option is a normal payment based on thirty year amortization. The second option is based on fifteen year amortization; the third option is an interest only payment, and finally a minimum payment option that does not cover all interest due that month. It is the fourth payment option that gets homeowners into trouble.

When you make payments based on the minimum payment amount you are not paying enough to cover the interest due that month. The amount of unpaid interest is added to the outstanding loan balance. This growing mortgage loan is a phenomenon called negative amortization. When your loan balance reaches 125% of the original balance, your lender will terminate the option agreement and the payments skyrocket.

Because these option loans are so easy to qualify, many homeowners with poor credit find they are unable to refinance the loan after reaching 125% of their loan balance. When this happens and they fall behind on the mortgage payments the lender will foreclose and take their home. According to the government, mortgage foreclosures are at record highs because of option mortgage loans.

If you are a homeowner with an option mortgage, how can you keep your mortgage afloat? First, avoid making the minimum payment and your loan will not be negatively amortized. If you find yourself unable to make your payments, contact your lender and ask for help. The mortgage lender may grant you a forbearance of several months, allowing you to get your finances in order or even refinance the loan to give you an affordable payment. It is important to ask for help before you get in trouble; youll find lenders are much more accommodating when you come to them before a problem arises.